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Monday, December 15, 2008

IATA Predicts ’09 Worst for 50 Years

While the U.S. industry is expected to be profitable next year, thanks to its dramatic and continuing capacity cuts, next year is expected to be the worst the industry has faced in 50 years, according to the International Air Transport Association (IATA). Its forecast for 2009, which shows the U.S. as the only region expected to turn a profit next year, also shows an industry loss of US$2.5 billion, half this year’s losses. IATA cited the decline in fuel costs balancing the dramatic decline in demand.
All regions, except the US, are expected to report larger losses in 2009 than in 2008. IATA also updated its forecast for 2008 to a loss of US$5.0 billion. This is slightly improved from the US$5.2 billion loss projected in the association’s September forecast primarily as a result of the rapid decline in fuel prices.

Airlines Contribute $1.1T to Economy
“Airlines are a driver of economic growth, contributing more than $1.1 trillion in value to the economy and creating more than 10 million jobs,” said United Airlines Chair, President and CEO Glenn F. Tilton after being elected chair of the Air Transport Association's board of directors. “With a modernized air traffic control system, we can deliver better financial, operational and environmental results to the benefit of our customers, our employees, our stakeholders and the communities we serve.” The outspoken industry exec will carry the airline industries banner as FAA reauthorization is considered for the third time by Congress.

Instead of a Piece of the Pie
After being bailed out during the last national crisis, it is not surprising that someone in the airline industry finally indicated that airlines were not too big to fail. American’s Gerard Arpey said the industry should not expect any government bailouts but did outline ways in which the government can help the beleaguered industry.
With the industry contributing $1.1 trillion to the economy, Arpey, who spoke to an editorial panel at the Dallas Business Journal, said it is deserving of economic stimulus but the money would be better spent on infrastructure improvements both on the ground and in the air rather than direct bailouts. He urged the industry to become actively engaged in stimulus discussions in view of President-Elect Obama’s pledge to $700 billion public works program.
"There's a long list of infrastructure needs in the industry right now," he told the journal, and listed such projects as airport runways and control towers, security enhancements for passenger and cargo facilities, and upgrades to the air traffic control system.
Saying he would have preferred a little respite between the fuel and demand crises, Arpey indicated that the latter has seamlessly replaced the former as concerning executive suites.

IATA Stats
Industry revenues are expected to decline to US$501 billion. This is a fall of US$35 billion from the US$536 billion in revenues forecast for 2008. This drop in revenues is the first since the two-year decline in 2001 and 2002. Yields will decline by 3.0 percent (5.3 percent when adjusted for exchange rates and inflation). Passenger traffic is expected to decline by 3.0 percent following growth of 2.0 percent in 2008. This is the first decline in passenger traffic since the 2.7 percent drop in 2001.
The improvement is due to an extraordinary situation for North American carriers," Chief Executive Officer Giovanni Bisignani said at a press briefing in Geneva "With very little hedging, they were hit with the full impact of high fuel. To cope, they cut capacity early and are now benefiting from the full impact of low spot prices. North America will be the only region in the black, but the expected US$300 million profit is less than 1.0 percent of their revenue. 2009 will be another tough year for everyone. The outlook is bleak. The chronic industry crisis will continue into 2009 with US$2.5 billion in losses. We face the worst revenue environment in 50 years.”
But, he said, the crisis could be an effective catalyst for change, especially to the more restrictive aspects of bilateral agreements.
The organization, in September, forecast a $4.1 billion loss next year, having based that prediction on $110 per barrel. However, oil is now trading at $45 per barrel and the association is predicting an average per-barrel price next year of $60. The predicted loss of $5 billion for 2008 is also lower than a previous estimate of $5.2 billion, which assumed an average oil price of $113 a barrel. Today's forecast figures the industry's total fuel bill will fall about $32 billion in 2009. During the year the loss projected by IATA has ranged as high as $6.1 billion in a worst-case scenario. The 2009 oil price is expected to average US$60 per barrel for a total bill of US$142 billion. This is US$32 billion lower than in 2008 when oil averaged US$100 per barrel.

All other regions will show losses, according to IATA:
• Asia-Pacific carriers will see losses more than double from the US$500 million in 2008 to US$1.1 billion in 2009. With 45 percent of the global cargo market, the region’s carriers will be disproportionately impacted by the expected 5 percent drop in global cargo markets next year. The region’s largest market - Japan - is already in recession. And its two main growth markets - China and India - are expected to deliver a major shift in performance. Chinese growth will slow as a result of the drop-off in exports. India’s carriers, which are already struggling with high taxes and insufficient infrastructure, can expect a drop in demand following on from the tragic terror incidents in November.
• Losses for European carriers will increase ten-fold to US$1 billion. Europe’s main economies are already in recession. Hedging has locked in high fuel prices for many of the region’s carriers in US dollar terms, and the weakened Euro is exaggerating the impact.
• Middle Eastern airlines will see losses double to US$200 million. The challenge for the region will be to match capacity to demand as fleets expand and traffic slows - particularly for long-haul connections.
• Latin American carriers will see losses double to US$200 million. Strong commodity demand that has driven the region’s growth has been severely curtailed in the current economic crisis. The downturn in the US economy is hitting the region hard.
• African airlines will see losses of US$300 million continue. The region’s carriers face strong competition. Defending market-share will be the main challenge.

Bisignani made special note of the continuing contraction of air cargo traffic that started in June 2008. “Air cargo comprises 35 percent of value of goods traded internationally,” he said. “The 7.9 percent decline in October is a clear indication that the worst is yet to come - for airlines and the slowing global economy. Cargo traffic is expected to decline by 5 percent, following a drop of 1.5 percent in 2008. Prior to 2008 the last time that cargo declined was in 2001 when a 6 percent drop was recorded.
“Airlines have done a remarkable job of restructuring themselves since 2001,” said Bisignani. “Non-fuel unit costs are down 13 percent. Fuel efficiency has improved by 19 percent. And sales and marketing unit costs have come down by 13 percent. IATA made a significant contribution to this restructuring. In 2008 our fuel campaign helped airlines to save US$5 billion, equal to 14.8 million tons of CO2. And our work with monopoly suppliers yielded saving of US$2.8 billion. But the ferocity of the economic crisis has overshadowed these gains and airlines are struggling to match capacity with the expected 3 percent drop in passenger demand for 2009. The industry remains sick. And it will take changes beyond the control of airlines to navigate back into profitable territory.”
Bisignani outlined an industry action plan for 2009 that reflected the association’s Istanbul Declaration in June of this year. “Labor must understand that jobs will disappear when costs don’t come down,” he said. “Industry partners must contribute to efficiency gains. And governments must stop crazy taxation, fix the infrastructure, give airlines normal commercial freedoms and effectively regulate monopoly suppliers,”

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